Digital tax finally rears its head

The long awaited, much delayed and well-nigh legendary Making Tax Digital (MTD) consultation documents finally arrived last week. The documents provided us with the first substantial details around HMRC’s plans to digitise the UK’s tax system.

The changes will fundamentally transform the relationship between businesses and HMRC. Despite this, an air of ambivalence seems to endure among many business owners. A recent client survey by the cloud accounting provider FreeAgent found 43% of respondents didn’t know what MTD actually was.

“I’m sort of not surprised that it’s something that advisers haven’t raised with their clients yet,” said Ed Molyneux, CEO of FreeAgent. “People who would normally be advising businesses on upcoming legislation were lacking information.”

The big change with MTD is that businesses will regularly update HMRC on their finances through “quarterly updates”. This will be done through accounting software. The aim is to give businesses a real time view of their tax liability.

As we suspected, software will play a central role in the MTD agenda. HMRC has promised this new system of record keeping will be facilitated through data sent to the taxman via the “push of a button”.

A distinctly utopian vision, for sure. But it does ignore a sizeable section of British taxpayers not currently using software. This, said Molyneux, presents the steepest challenge of MTD: onboarding people onto accounting software. “People also underestimate, if you’ve just been using a paper based system and you don’t have regular contact with software, how much software has changed in the last 2-3 years.

“You’ve now got daily bank feeds, online filing for VAT, smartphone apps – there’s a lot that has happened.” According to Molyneux, MTD will be less about digitising the tax system than it is about moulding it “to make it digitisable in a pragmatic way”.

It’s a realisation that has seemingly dawned on HMRC. The tax authority will offer exemptions for unincorporated businesses and landlords with turnover under £10,000 p.a. Over and above that, the newly merciful tax authority will also grant a year’s grace to another section of small business, although the threshold for this remains to be determined.

The concern over the financial impact on small businesses of essentially mandating the use of accounting software still remains a worry, however. HMRC has attempted to assuage these concerns through promising free apps that will help with quarterly reporting. These apps, HMRC has said, will be provided by the market.

But, as with many things MTD, detail remains flaky and it doesn’t seem that software providers are overly keen to provide free services. “I think what we’re trying to figure out is what is the expectation HMRC will set around what kinds of customers should feel entitled to this free app?” said Molyneux.“If it’s only customers earning between 10 to 20,000 pounds, one could say that’s an interesting part of the market. We could provide them with a free app and they could then potentially grow into FreeAgent customers in due course, like a freemium model.

“If they say everyone who isn’t VAT registered, well that’s a very different proposition and that isn’t something we wouldn’t be comfortable doing. We do see it as potentially being a great opportunity, but details remain sketchy as to who would be entitled to that software and who should be in the market for paid software.”